Investors bet on 30% falls by 2011

GDB2222

Actually, I am very surprised that there are not more buyers of the 3 year property future. It makes reasonable sense for a householder to sell at current prices and buy the future at a 30% discount. He can rent for a 3 year period knowing that he has locked in his 30% profit.

Example:
I sell my house now for the average house price (£185,000). I buy a 3 year future at a 30% discount, ie £130,000. So, I have £55,000 cash in my pocket (or I have reduced my mortgage by £55,000). I rent for 3 years (cost say £25,000).

At the end of 3 years, I am guaranteed to be able to get back into the property market, because of the future I have bought for £130,000. I don't care whether in 3 years time average prices are higher or lower than now, because my future value will move in line with the average house price. So, I can STR, but without any risk whatsoever.

Why aren't more people doing that?

nobblyned

And therein lies the purpose of a forward market, and the reason they aren't good predictors of the future.

As prices are coming down, the forward price will fall until it reaches the point where it is economically viable to trade the front to back spread as you describe. i.e. hold a physical short position and buy the forward.

The reason it has to be so large in the housing market is due to the cost and hassle of transacting both the physical and the forward. i.e. Stamp Duty, EA fees, moving costsx2, spread on the forward, hassle of moving in real life etc.

dudleyboy

I think 30% falls are a little optimistic.



More like 50%...

hearts

dudleyboy wrote: »

I think 30% falls are a little optimistic.



More like 50%...

Fool ;-) The grin is perfect for you.

hearts

GDB2222 wrote: »

Actually, I am very surprised that there are not more buyers of the 3 year property future. It makes reasonable sense for a householder to sell at current prices and buy the future at a 30% discount. He can rent for a 3 year period knowing that he has locked in his 30% profit.

Example:
I sell my house now for the average house price (£185,000). I buy a 3 year future at a 30% discount, ie £130,000. So, I have £55,000 cash in my pocket (or I have reduced my mortgage by £55,000). I rent for 3 years (cost say £25,000).

At the end of 3 years, I am guaranteed to be able to get back into the property market, because of the future I have bought for £130,000. I don't care whether in 3 years time average prices are higher or lower than now, because my future value will move in line with the average house price. So, I can STR, but without any risk whatsoever.

Why aren't more people doing that?

GAMBLERS NEVER LOSE, QUITE RIGHT!

bdon

hearts wrote: »

GAMBLERS NEVER LOSE, QUITE RIGHT!

Quite right - the majority of people who gamble on spread-betting lose. http://www.financial-spread-betting.com/Losers.html (quickest link I could find, this is from a company who offer spread betting, belive actuals probably more grim).

Just like casinos - they don't need to load weights onto the roulette wheel - the maths ensure they win over the long term.

Spread betting / CDF companies do it with the spreads and the stops, casinos do it with the green zero.

Dabble if you must but never more than a days pay and certainly NOT if you are in debt already!

Personally I do believe the house prices will readjust by about 30% but I'm no more likely to place a spread bet than I would put my deposit on red...

beingjdc

bdon wrote: »

Quite right - the majority of people who gamble on spread-betting lose.

That's not the point. In the example quoted, it doesn't matter what happens, you win.

Sell your £150k house and bet on prices being above £120k.

House prices rise 20% - you pay £30k extra to buy your house back, but make £60k on the bet.

House prices don't fall - you buy it back for the price you sold, and have £30k

House prices fall 20% - you buy your house back at a £30k profit and are quite on the spread bet.

House prices fall 40% - you lose £30k on the bet, but save £60k on buying your house back.

Any way up, you make £30k.

Generali

beingjdc wrote: »

That's not the point. In the example quoted, it doesn't matter what happens, you win.

Sell your £150k house and bet on prices being above £120k.

House prices rise 20% - you pay £30k extra to buy your house back, but make £60k on the bet.

House prices don't fall - you buy it back for the price you sold, and have £30k

House prices fall 20% - you buy your house back at a £30k profit and are quite on the spread bet.

House prices fall 40% - you lose £30k on the bet, but save £60k on buying your house back.

Any way up, you make £30k.

You're ignoring financing the future. I haven't the time to look at the product but financing a 3 year future is going to be expensive.

kennyboy66_2

beingjdc wrote: »

That's not the point. In the example quoted, it doesn't matter what happens, you win.

Sell your £150k house and bet on prices being above £120k.

House prices rise 20% - you pay £30k extra to buy your house back, but make £60k on the bet.

House prices don't fall - you buy it back for the price you sold, and have £30k

House prices fall 20% - you buy your house back at a £30k profit and are quite on the spread bet.

House prices fall 40% - you lose £30k on the bet, but save £60k on buying your house back.

Any way up, you make £30k.

Generali is correct, the costs of financing this are significant - you also ignore the transaction costs of buying and selling your house. I suppose if you planned to move anyway now you could ignore the transaction costs.

Just as importantly the spread on spreadfair is huge on the 2011 contracts. You can sell at 135k but buy at 145k.

You would need to put 7.5% margin up, & pay commision and charges of £350 on a profit of £1100 on spreadfair (using their example for 2011 contracts).

I don't actually think that these indicies are traded much by professional institutions at all.
I think they are just a bit of a fun gamble.

Generali

kennyboy66 wrote: »

Generali is correct, the costs of financing this are significant - you also ignore the transaction costs of buying and selling your house. I suppose if you planned to move anyway now you could ignore the transaction costs.

Just as importantly the spread on spreadfair is huge on the 2011 contracts. You can sell at 135k but buy at 145k.

You would need to put 7.5% margin up, & pay commision and charges of £350 on a profit of £1100 on spreadfair (using their example for 2011 contracts).

I don't actually think that these indicies are traded much by professional institutions at all.
I think they are just a bit of a fun gamble.

You'd also need to be able to increase your margin often on the same day if the market moved against you. If you couldn't meet the margin call immediately then they'd liquidate your position for you.

Being ill, on holiday or at a funeral (including your own) wouldn't be good enough reasons not to meet the margin call.